Value Partners China Convergence Fund‧Morningstar Fund Awards 2010 Special Editorial

Value Partners China Convergence Fund

This week, we are pleased to have our Greater China Equity Category winner – Value Partners China Convergence Fund – in the Fund Award Special Editorials. Value Partners is an eminent investor in Asia. Cheah Cheng Hye, one of the co-founders of Value Partners, is the leader of the company, as well as all offerings under the company’s name. Being a rare outperforming mandate offered by a local house, this fund earns strong appeals from Hong Kong investors. For 2010, the company’s China Convergence Fund won our Morningstar Fund Award for the Greater China Equity category.

Performance

Value Partners China Convergence Fund is not shining recently, with a close-to-average 1-year return of 15.86% as at June end this year, but its longer term performance is brilliant – its 3-, 5- and 10-year annualized returns are 17.80%, 21.05% and 20.05% respectively as at June 2011, all ranked in the best decile. In 2010, the fund gained 21.35%, winning 97% of its peers.  

Key to Success

The fund is managed by a stable team of 34 investment professionals led by Value Partners’ Co-Chief Investment Officers, Cheah Cheng Hye and Louis So. They focus on the bottom-up approach driven by stock selection, rather than top-down approach driven by macro themes. That said, macro overlay is indispensably required for risk consideration. For example, the fund can increase the portfolio’s cash level if the team anticipates rising market volatility.

The flexibility in asset allocation, especially in cash level, is one of the pivots of the fund’s success. During the first half of 2010, the management team alerted that the market was too optimistic upon the 2010 growth given the buoyant 2009. Adding that the policy risk was increasing, the team adopted a cautious strategy by increasing cash level. In June 2010, the fund’s cash level stood at over 20%. In late 2010, the team turned its portfolio back to be fully-invested based on improved market sentiment and more signs showing the China economy was heading for a “soft landing”.   

Focuses

Increased cash level doesn’t mean that the team gave up growth opportunities. The team believed in China domestic growth theme and held an overweighting position over selective pharmaceuticals, including United Laboratories and Tianjin Zhong Xin Pharmaceutical, which were the top contributors in 2010.

It is not unusual to see Value Partners’ fund to have short positions and with gold exposure. The team affirmed that these are effective ways to hedge against risks. Inflation will be one of the most critical risks during 2011. And the team agreed that investing in energy, mining and precious metals are good ways to hedge against inflation. CNOOC, several Southeast Asian palm oil stocks and Loco-London gold are holdings that could hedge against inflation. The team will probably maintain interest in selective consumer discretionary stocks if inflation remains uncontained. The key reason is that these companies are more capable of passing the rising cost to end consumers since demand for luxury goods remains strong.

Value Partners has less hesitation in using short position or derivatives. The team admitted that they employed derivatives from time to time in different market conditions with limited exposures. Value Partners controls the related risks with a designated manager monitoring the liquidity levels of the fund. Liquidity reports are regularly produced so as to ensure enough cash is placed to meet margin requirements. Moreover, Value Partners also has procedures and systems in place to proactively monitor the margin level of the fund. There is a tracking system being used to facilitate the daily mark-to-market calculations and the net exposure calculations for all counterparties.

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There is a common characteristic for Morningstar Award winning funds – they usually emphasize value investing. Value Partners follows the hallmark “3R” value style investment principles – invest in the Right business, run by the Right people, at the Right price. The management team agreed that they are willing to challenge common market views to add value. In other words, the fund tries to be a contrarian. The fund is a risk lover instead of a risk-averse one, so investors should expect more aggressive moves in the fund’s positioning.